How to Choose a Strategy for the Coming New Year
Now’s a good time to start thinking about which types of mutual funds to hold next year. But before you do, you will have to grapple with a related question: What will happen to the economy in ‘92?
“The main risk is that economic growth might not pick up,” says Stephen McKee, editor of the No-Load Mutual Fund Selections & Timing Newsletter, based in Dallas. “If we slide back into recession, all equity funds will do poorly--you would want to have your money in bond funds.”
McKee is cautiously optimistic for ’92 and doesn’t anticipate a relapse. But he advises investors to keep an eye on the index of leading economic indicators, a generally reliable precursor that has been nudging higher in recent months.
Assuming that the economy gets back on track next year, here are some fund categories that could do well:
* Small-company funds. They are up about 38% through mid-December of this year, compared to 21% for all equity portfolios, reports Lipper Analytical Services. Yet they may still offer good potential, since small stocks tend to go through cycles of boom and bust that last several years.
They did especially well from ’63 through ’68 and from ’74 through ’83. But they lost half their value from ’69 through ’73 and badly lagged the blue chips from ’84 through ’90. Advisers who recommend small-company funds think 1991’s sizzling performance may be the beginning of another multi-year rally.
“From a valuation standpoint, small stocks are still fairly attractive,” says Craig Litman, co-editor of L/G No-Load Fund Analyst, a San Francisco newsletter.
Besides, many small companies are growing faster than large firms, and they’re often able to respond more quickly to economic changes. So when the economy picks up steam again, small outfits will find it easier to speed up production, says Daniel Wiener, editor of Vanguard Adviser, a New York investment newsletter. “They’ll run between the legs of the large companies.”
* Health care funds. Among sector funds, which concentrate on companies in a single industry or group of related industries, health care portfolios may still be worth a look for aggressive individuals. Managers of these funds can invest in an array of medical companies, including pharmaceutical firms, equipment manufacturers and biotechnology companies.
The steady growth of health care is what’s propelling the group. Medical expenditures account for 12% of gross national product, and some experts think that could rise to 16% by the turn of the century. “Biotechnology companies are developing great new wonder drugs, and as they team up with large pharmaceutical firms, they will have a worldwide marketing reach,” says Wiener.
Not everybody believes that the investment momentum will keep going, at least in the short term. “The health-care funds have had big gains, but that won’t last,” predicts McKee.
The funds have risen a whopping 58% this year, following gains of 20% last year and 44% in 1989. If they hold onto their lead in ‘91, the group will have finished first three straight years--an unprecedented feat for any sector-fund category.
* International funds. Advisers who currently like foreign stocks and funds are generally contrarian, since most big overseas markets haven’t done as well as U.S. equities this year.
One factor that has weighed down foreign stocks is the prospect of recession. The U.S. economy was one of the first to contract and, consequently, could be among the first to recover. “In Europe, the interest rates are high, and the economies are starting to slow this year,” says Nancy Langwiser, manager of MFS Lifetime Global Equity Trust, a Boston mutual fund. “It’s still unclear how bad it will be.”
Now might not be an optimal time to invest in international funds, but there eventually will be excellent opportunities, perhaps later in ‘92, predicts Wiener.
Another reason to go international is that so many of the world’s most innovative and profitable companies are foreign. Also, an international fund or two can add diversification to your holdings. Wiener suggests buying shares using a dollar-cost averaging strategy.
* Bond funds. Bond prices, which move inversely to interest rates, have risen this year as rates have trended lower. In general, according to Lipper, fixed-income funds are showing gains of about 16%, including interest--a good year. Selected bond funds should continue to do well--as long as economic growth doesn’t surge, pushing interest rates and inflation higher. Yet there’s disagreement over which categories are most promising.
Litman, for example, recommends municipal portfolios, arguing that tax-exempt bonds haven’t appreciated as much as taxable debt. Wiener, by contrast, likes high-quality, intermediate-term corporate bond funds, which wouldn’t get hit as hard as long-term portfolios, should interest rates rise.
Leslie Nanberg, manager of MFS Worldwide Governments Trust, likes the potential of foreign bonds in selected markets. According to MFS, long-term government bonds in nations such as France, Australia, Sweden and Canada are yielding 6% or better after inflation, compared to 4% in the United States. The environment for international bond funds is attractive, he says, because there’s little inflation risk overseas.
Just remember that bond prices anywhere could get clobbered if interest rates rise. That’s something conservative investors should keep in mind before pulling their money out of low-yielding certificates of deposit, cautions Esther Berger, a stockbroker with Paine Webber in Beverly Hills.
